Greece: Drifting away from default

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The austerity measures agreed recently by the Greek Parliament have yet to convince EU leaders, and though the country may avoid default, it is likely to drift into other dark alleys, writes Anna Visvizi from DEREE – The American College of Greece.

Anna Visvizi is a political and economic analyst and associate professor at DEREE – The American College of Greece. The following provided exclusively to EURACTIV Germany.

"Following several days full of dramatic turnovers and unbearable suspense, on 13 February, the Greek Parliament approved the set of measures that the Troika presented to the Greek government a few days earlier…only to find out that it was not enough to start discussions with the Eurogroup (now on hold).

Although, as it seemed, by voting in favour of the measures demanded by the Troika, Greece was about to head off the default, current developments in Greece suggest that drifting in the unknown may be even more spooky.

What has been agreed on Sunday night?

Apart from the measures concerning the banking system in Greece and its re-capitalisation, the major issues agreed on Sunday night, that over the period 2012-2015 are about to produce savings of the value of €15 billion, aim at:

  • labour market reforms aimed at increasing its flexibility (via minimum-wage reduction by 22% in general and 32% for employed below the age of 24, limiting the duration of sectoral pay agreements to three years, imposing freeze on wage indexation, etc.);
  • public sector restructuring via reduction in employment by 150,000 up to 2015; reduction in the number of employed as stagiaires; freezing the possibility of tenure in the state-owned enterprises;
  • limiting the general government expenditure via reduction in the so-called special salaries, i.e. army, police, clergy, university professors; making one-third of the total wage expenditure from the general budget; further reduction in pensions; the possibility of further wage reduction in the public sector via cuts in public investment, pharmaceutical spending, expenditure on local administration, and the defence budget;
  • privatisation of the value of €19 billion by the end of 2015;
  • liberalisation of services (via lifting barriers of entry to the restricted professions);
  • increasing revenue of the government by increasing taxation via  further indirect VAT and direct measures scheduled to be introduced around June this year; any remaining tax breaks are to be cancelled; about 10,000 checks on individuals and companies only in 2012 will be run with the aim to collect overdue taxes (on account of VAT) from individual and corporate actors.

Why was the Eurogroup meeting postponed?

The measures agreed on Sunday included several conditions that were either ill-defined and/or did not take into account the real value of the recession in Greece in 2011. (The most recent estimates suggest that the economy shrunk by 6.8% of GDP in 2011, following a ‘mere’ 4.5% of GDP in 2010.) As a result, the range of the fiscal adjustment measures has had to be recalculated again and again since last week.

At present the problem is that even if the math will do, it is uncertain how feasible the assumptions upon which the agreement rests are. For example, the agreement assumes that in 2012 €2 billion will be collected from overdue taxes, thus boosting the government revenue. As several of the companies-debtors have been wound up and/or liquidated, it is highly unlikely that the amounts of money visible in the accounting reports will ever materialise.

Moreover, as unemployment has skyrocketed (from around 10% in 2010 to 21% today; this number does not include, however, the self-employed, e.g. shop owners, who were forced to close down their businesses), and the number of companies that closed in 2011 reached 34,517 (against 27,545 that have been newly established), it remains an open question what the general government revenue will be in 2012.

The problem

The problem is that already today, the second rescue programme for Greece does not seem like a recipe that can be successfully followed. What is even more worrying is that Greece, apparently, has become the scapegoat of several European politicians that by attacking Greece seek to shy away from admitting that they also hold a part of responsibility for what has happened to the country since late 2009.

In this context it is not uncommon to hear that Greece should leave the eurozone, or that the Greek politicians should leave domestic politicking aside and – following the example of Italy – the parliamentary elections should be postponed. As these two issues are very closely connected and constitute an important piece of the Greek puzzle, a short explanation is in order.

Some explanations

Although the possibility of Greece leaving the eurozone and returning to the drachma gains on supporters, any discussion that takes this possibility seriously lacks the understanding of the following: Although a return to the drachma would lead to nominal devaluation and a short-lived growth based on positive expectations rather than on anything else, in the longer-run it would make the Greek economy (dependent on imports) unable to function. A return to the drachma would therefore mean inflation, uncertainty, and a total economic and social disaster. Another aspect of the would-be return to the drachma is that the disoriented population would be an easy prey to manipulation by communist/leftist parties.

By now, opinion polls suggest that these parties in Greece receive 42% of the respondents’ support, against 31% for the conservative Nea Democratia, and 8% for the socialist PASOK. The point is that that in Greece the communist parties still employ the Stalinist rhetoric of the 1950s and the leftist parties are still driven by the flawed ideas that underpinned communism. Since the Greeks have never experienced communism or socialism in the way that Central and Eastern Europe did, the ideas of ‘a shiny happy future’ that communism and socialism promise fall on a very fertile ground. This is something that the West has not quite understood yet.

What follows is that Greece needs a democratically elected government that would induce hope in the society. The current government, contrary to what reverberates in the public discourse in the West, is neither a coalition government nor a government of technocrats. To be specific, out of 50 members of the cabinet, 40 originate from the socialist PASOK, six from the conservative Nea Democratia, and four from the right-wing popular LA.OS. The mandate of the government is limited and it will expire once the second rescue package for Greece is signed and the voluntary bond-exchange programme is activated.

How will the situation in Greece develop? It depends on the outcome of the parliamentary elections and on the stance that the EU-leaders will adopt toward the new government."

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